IP: Why do patent cases cost so much to get through trial?

It is no secret that patent cases are some of the most expensive cases to get through trial. There has been growing concern in the commentary and in Congress that the costs of patent litigation introduce an unacceptable risk to patent litigants of taking their cases to trial. It may be a surprise that the costs and risks of patent litigation are made worse, not better, by recent scrutiny of large patent verdicts and by the likelihood of appellate intervention in trial court decisions. Complicated damages analysis, the role and review of expert opinions, and the likelihood of de novo review all drive up the costs of patent litigation.

Factually Intensive Issues

In trials, proving facts costs money. Proof involves discovery and witnesses, and both are significant drivers of litigation costs. Document discovery has become notoriously expensive (although good and early discovery management can significantly mitigate document discovery costs). Depositions can also be expensive: They involve a lot of preparation and out-of-pocket costs, such as court reporters and travel-related expenses. Interpreted depositions in foreign countries can easily run into tens of thousands of dollars per witness.

It may not be surprising that it usually takes a lot of facts to educate a court and a jury about a technology that is—by definition—supposed to be new and unknown. It may be a little more surprising that the damages proofs in patent cases are becoming even more complex than the technology issues.

The baseline damages calculation for the most simple patent damages case is a “reasonable royalty,” which can be determined by multiplying a royalty rate (such as 10 percent) by the sales revenue of a product. Even before more recent complications, the reasonable royalty analysis used a 14-factor test known as the Georgia-Pacific test to assess the royalty. Judge Richard Posner recently ridiculed the Georgia Pacific test as impossible for juries to apply.

Moreover, the Georgia-Pacific test involves the construction of a hypothetical negotiation, or, in other words, a thought experiment. The basic exercise is to go back in time and pretend that the parties to the lawsuit sit down at a negotiating table and—contrary to the reality that led to a trial—agree on a royalty amount that is reasonable in light of the patent, the product that is accused of infringement, and many other factors such as alternatives and substitutes that might have been available at the time. That is the stuff of expert opinion.

Fourteen factors and a hypothetical makes for lots of factual issues, lots of discovery, and lots of expert analysis and testimony, and that adds up.

It Takes Experts

In recent years, the reasonable royalty calculation has become even more complex and difficult in many cases, based on close scrutiny of the factual basis and expert opinions underlying patent damage verdicts. For example, the doctrine of the “entire market value rule” or the “least saleable unit” can be employed to try to determine the specific relative value the patented invention contributes in the accused product, as compared to other possible contributions to consumer demand for the product, such as other nonpatented technology in the product.

In some cases, the recent, renewed focus on the specific contribution of the patented invention to the value of the product has encouraged litigants to undertake sophisticated econometric analyses, such as multiple regressions, and studies of the market elasticity of demand under changing assumptions about the design and features of a product. Sometimes surveys are necessary to support regressions and other econometric studies. These studies can provide great insights into the contribution of the patented invention to value, but they involve several experts who may not have been used in the past, such as economists and survey experts. And that happens on both sides of the case because each side needs to be able to evaluate the opinions. A damages model that used to involve a single CPA may now involve three or four damages experts who rely on large volumes of discovery for their opinions.

In some cases, more complex damages analysis leads to better and more accurate damages calculations. In others, I am quite certain it does not. But there is no question that these more complex and more factually intensive damages analyses are more expensive and drive up litigation cost. At present, there is no well-accepted doctrine that the complexity of the damages analysis might be tailored to the value of the case, allowing simpler damage analyses in lower-value cases.

It is also worth noting that the cost of technical experts in patent cases seems, at least to me, to be going up as well. Damages experts in difficult technology fields are currently asking double to triple the hourly rates that prevailed not very long ago.

The De Novo Effect

Patent cases are somewhat unique in that every case is all but guaranteed to generate de novo appeal issues. At a minimum, the likely suspects are: the Markman ruling in which the trial court interprets the meaning of words or phrases in the patent claims as a matter of law; in some cases, the obviousness determination, which is a legal conclusion based on underlying facts; and Daubert issues related to all of the experts, but especially the damages experts in recent years.

De novo appeals generate uncertainty because the jury verdict ends up being a weigh station with only a weak indication of the outcome. There is a second bite for the loser, in the form of an appeal. The mere fact of a second bite generates uncertainty. In patent cases, some might conclude that the uncertainty of appeal is even greater than in other types of cases. Patent law is complex and full of opportunities for an appellate panel to reverse. But in addition, there is a certain amount of disagreement among appeals court members about what the law is or should be, and recently, the Federal Circuit’s Chief Judge has suggested that the Supreme Court hasn’t helped matters. These disagreements at the appellate levels make the outcome of appeals especially hard to predict.

The de novo standards in patent cases are not at all free of controversy. Many respected Federal Circuit members have called for a more deferential standard, particularly when it comes to the Markman decision, and the court has now agreed to revisit what the proper standard should be in en banc review in the pending case of Lighting Ballast Control v. Philips Electronics North America Corp. And yet, it seems clear that the Federal Circuit is determined to apply scrutiny, perhaps in part based on the high costs of patent litigation.

Without greater predictability, it is difficult for counsel and for parties to reach stipulations on issues that might otherwise be uncontested and might focus discovery and trial. It is difficult for parties to settle cases. And all of that leads to more protracted, more complex, and more expensive litigation.

Patent law, and in particular patent litigation, has reached the attention of the public and of Congress. There are calls for change and for reform. Doubtless, there are things we could do to simplify patent litigation and make it less expensive. It is worth assessing whether some of the factors that contribute to the expense of patent litigation are investments in a better system or needless externalities.